What is Bitcoin Mining?

Praveen Reddy Kanthala, Mechanical engineering from National Institute of Technology, Rourkela, answers the question on Quora: What is Bitcoin Mining?

Bitcoin, the first cryptocurrency ever created has indeed become the most widely used digital currency on earth. Ever since the existence of Bitcoin in 2009, it has witnessed unprecedented growth across the world. The reason for its worldwide acceptance is no other than its ability to changed the way transactions are conducted in many electronic platforms. Conventionally, electronic card transactions take approximately three business days to get confirmation. On the other hand, Bitcoin transactions take few minutes to be confirmed on the blockchain.

Unlike ever before, the world is now able to transfer and receive funds locally and internationally at low costs, and the potential is increased given that a significant number of people in developing countries do not have access to the formal financial system, and compared to the developed countries where the competition is fierce in the financial institutions, little number of banks available in the under-developed countries imposed very high fees during international transactions.

Being universal and decentralized with low remittance, it’s gradually drawing in more users in such countries. Unlike the centralized fiat payment systems, Bitcoin is fully open-source and decentralized. Transactions can be verified independently at any time, and payments can be made instantly and directly without an intermediary.

Due to the widespread proliferation of the internet and mobile devices, more people in the developing world now have access to web services. It, therefore, follows that the number of Bitcoin users should increase as a result. Citizens who find it inconvenient to access traditional banking services will seek out virtual systems such as Bitcoin, and as internet usage increases within the developing world, one can only predict that the adoption of Bitcoin (and cryptocurrencies generally) will go viral.

Bitcoin’s distributed confirmation model gets around the expensive and time-consuming system by using peer-to-peer technology to operate without a central authority or banking institution.

How The Bitcoin Is Created?

Being a distributed system with no central point of failure, have you’ve ever wondered where Bitcoin comes from? and how it goes into circulation?

Why do we need Bitcoin mining? We need it because there’s no central government managing Bitcoin. Typically, a central government issues new coins for a currency. The U.S. Mint issues U.S. dollars, for example.

With Bitcoin, there’s no Bitcoin mint. There’s just Bitcoin users. That’s what makes it a peer-to-peer currency.

The more math problems that computer can solve, the more Bitcoins that user will generate. Computers solve these problems using their processing power: the more processing power you have (like in your GPU and CPU), the more Bitcoins you’ll be able to mine.

As more and more Bitcoin users run their mining software, the math problems become harder and harder to solve. This keeps the growth of Bitcoins at a steady pace – which means the currency won’t suddenly collapse if a million people downloaded and install Bitcoin mining software.

The difficulty of Bitcoin mining doesn’t change on-the-fly. Instead, it changes about every 2 weeks based on the changing computational power of the Bitcoin network.

Now that you got a brief overview of what it is. Let’s jump in-depth and see how it works.

Bitcoin mining is the process by which the transaction information distributed within the Bitcoin network is validated and stored on the blockchain. Bitcoin mining serves to both add transactions to the blockchain and to release new Bitcoin. The concept of Bitcoin mining is simply the process of generating additional Bitcoins until the supply cap of 21 million coins has been reached. What makes the validation process for Bitcoin different from traditional electronic payment networks is the absence of middleman in the architecture. The process of validating transactions and committing them to the blockchain involves solving a series of specialized math puzzles. In the process of adding transactions to the network and securing them into the blockchain, each set of transactions that are processed is called block, and multiple chains of blocks is referred to as the blockchain.

Technically, during mining, the Bitcoin mining software runs two rounds of SHA256 cryptographic hashing function on the block header. The mining software uses different numbers called the nonce as the random element of the block header for each new hash that is tried. Depending on the nonce and what else is in the block the hashing function will yield a hash of a 64-bit hexadecimal number. To create a valid block, the mining software has to find a hash that is below the difficulty target.

A difficulty is a number that regulates how long it takes for miners to add new blocks of transactions to the blockchain. Because the target is such an unwieldy number with tons of digits, people generally use a simpler number to express the current target. This number is called the mining difficulty. This difficulty value updates every 2 weeks to ensure that it takes 10 minutes (on average) to add a new block to the blockchain. The difficulty is so important because, it ensures that blocks of transactions are added to the blockchain at regular intervals, even as more miners join the network. If the difficulty remained the same, it would take less time between adding new blocks to the blockchain as new miners join the network. The difficulty adjusts every 2016 blocks. At this interval, each node takes the expected time for these 2016 blocks to be mined (2016 x 10 minutes) and divides it by the actual time it took. It can be calculated as follows:

Expected / Actual

20160 / Actual

If miners were able to solve each block more quickly than expected; say 9 minutes per block, for example, you’d get a number like this:

20160 / 18144 = 1.11

Each node then uses this number (1.11) to adjust the difficulty for the next 2016 blocks:

difficulty x 1.11 = new difficulty

If the number is greater than 1 (i.e. blocks were mined quicker than expected), the difficulty increases.

If the number is less than 1 (i.e. blocks were mined slower than expected) the difficulty decreases.

Every miner on the Bitcoin network now works with this new difficulty for the next 2016 blocks.

At most, the difficulty will only adjust by a factor of 4, to prevent abrupt changes from one difficulty to the next.

The mining difficulty expresses how much harder the current block is to generate compared to the first block. So, a difficulty of 20160 means to generate the current block you have to do 20160 times more work than the work done in generating the first block.

The blocks chain is secured by the miners. Miners secure the block by creating a hash that is created from the transactions in the block. This cryptographic hash is then added to the block. The next block of transactions will look to the previous block’s hash to verify it is legitimate. Then the miner will attempt to create a new block that contains current transactions and new hash before any other miner does.

In the process of mining, each Bitcoin miner is competing with all the other miners on the network to be the first one to correctly assemble the outstanding transactions into a block by solving those specialized math puzzles. In exchange for validating the transactions and solving these problems. Miners also hold the strength and security of the Bitcoin network. This is very important for security because in order to attack the network, an attacker would need to have over half of the total computational power of the network. This attack is referred to as the 51% attack. The more decentralized the miners mining Bitcoin, the more difficult and expensive it becomes to perform this attack.

Rewards For Mining

As specified by the Bitcoin protocol, each miner is rewarded by each block mined. Currently, that reward is 12.5 new Bitcoins for each block mined. The Bitcoin block mining reward halves every 210,000 blocks, when the coin reward will decrease from 12.5 to 6.25 coins. Currently, the total number of Bitcoins left to be mined amounts to 4,293,388. This means that 16,706,613 Bitcoins are in circulation and that the total number of blocks available until mining reward is halved is 133,471 blocks till 11:58:04 12

Jun 2020 When the mining reward will be halved.

I addition to the block reward, Bitcoin miners are rewarded for all of the transactions they process. They receive fees attached to all of the transactions that they successfully validate and include in a block.

Because the reward for mining blocks is so high (currently at 12.5 BTC), the competition to win that reward is also fierce among miners. At any moment, hundreds of thousands of supercomputers all around the world are competing to mine the next block and win that reward. In fact, according to howmuch.com -&nbspHowmuch Resources and Information., ” the total power of all the computers mining Bitcoin is over 1000 times more powerful than the world’s top 500 supercomputers combined”.

What’s the Point of Bitcoin Mining?

Bitcoin mining is an essential part of the world’s largest cryptocurrency. Bitcoin help keep the Bitcoin network safe, stable, and secure.

How does Bitcoin mining keep the network safe, stable, and secure? Mining Bitcoins does two things.

First, it adds transactions to the blockchain.

Second, it releases new Bitcoins.

When you mine Bitcoins, you’re compiling all recent Bitcoin transactions into blocks and trying to solve a difficult puzzle (the Bitcoin algorithm).

Whichever miner solves the puzzle first gets to place the next block on the blockchain and claim their rewards. Those rewards include the newly released Bitcoin as well as transaction fees from the Bitcoin transaction that just got added to the blockchain. Not all Bitcoin transactions have transaction fees.

The reward for mining Bitcoins has diminished over time. This is done on purpose to slow the release of Bitcoins over time. There will only be 21 million Bitcoins released over the entire course of the project.

The reward for mining is cut in half every 210,000 blocks or about every 4 years. In 2009, the block reward was 50 Bitcoins. In 2014, it was reduced to 25 Bitcoin.

Bitcoin Mining Requirements

Anyone who can run the mining program on the specially designed hardware can participate in mining. Over the years, many computer hardware manufacturers have designed specialized Bitcoin mining hardware that can process transactions and build blocks much more quickly and efficiently than regular computers, since the faster the hardware can guess at random, the higher its chances of solving the puzzle, therefore mining a block.

Hardcore Bitcoin miners invest tens of thousands of dollars into their computers (or multiple computers). Early in the days of Bitcoin, miners realized that graphics cards were much better suited to solving Bitcoin algorithms than traditional CPUs.

As a result, Bitcoin mining computers often have two or three GPUs.

There are also specialized Bitcoin mining computers anyone can buy. These computers are specially built for just one task. They mine Bitcoins using Application-Specific Integrated Circuit (ASIC) chips.

We’ll discuss the two basic mining requirements below:

Hardware

Over the years, due to the advancement in technology and need for more efficient hardware, there have been four major types of hardware used by miners.

The CPU

In order to have an edge in the mining competition, the hardware used for Bitcoin mining has undergone various developments, starting with the use of the CPU. The CPU can perform many different types of calculations including Bitcoin mining. In the beginning, mining with a CPU was the only way to mine Bitcoins and was done using the original Satoshi client. Unfortunately, with the nature of most CPU in terms of multi-tasking, and its optimization for task switching, miners innovated on many fronts and for years now, CPU mining has been relatively futile.

The GPU

After some months later, after the network started, it was discovered that high-end graphics cards were much more efficient at Bitcoin mining. The Graphical Processing Unit (GPU) handles complex 3D imaging algorithms, therefore, CPU Bitcoin mining gave way to the GPU. The massively parallel nature of some GPUs allowed for a 50x to 100x increase in Bitcoin mining power while using far less power per unit of work. But this still wasn’t the most power-efficient option, as both CPUs and GPUs were very efficient at completing many tasks simultaneously, and consumed significant power to do so, whereas Bitcoin in essence just needed a processor that performed its cryptographic hash function ultra-efficiently.

The FPGA

A few years ago, CPU and GPU mining became completely obsolete when FPGAs came around. An FPGA is a Field Programmable Gate Array, which can produce computational power similar to most GPUs while being far more energy‐efficient than graphics cards. Due to its mining efficiency, and ability to consume relatively lesser energy, many miners shifted to the use of FPGAs.

Field Programmable Gate Array (FPGA) was capable of doing just that with vastly less demand for power. Its real virtue was the fact that the reduced power consumption meant many more of the chips, once turned into mining devices, could be used alongside each other on a standard household power circuit.

The ASICS

An ASIC (application-specific integrated circuit) is a microchip designed for a special application, such as a particular kind of transmission protocol or a hand-held computer. An ASIC is a chip designed specifically to do only one task. Unlike FPGAs, an ASIC cannot be repurposed to perform other tasks. An ASIC designed to mine Bitcoins can only mine Bitcoins and will only ever mine Bitcoins. The inflexibility of an ASIC is offset by the fact that it offers a 100x increase in hashing power compared to the CPU and GPUs while reducing power consumption compared to all the previous technologies.

As Bitcoin’s adoption and value grew, the justification to produce more powerful, power-efficient and economical devices warranted the significant engineering investments in order to develop the final and current iteration of Bitcoin mining semiconductors. ASICs are super-efficient chips whose hashing power is multiple orders of magnitude greater than the GPUs and FPGAs that came before them. Succinctly, it’s a custom Bitcoin engine capable of securing the network far more effectively than before.

It is conceivable that an ASIC device purchased today would still be mining in two years if the device is power efficient enough and the cost of electricity does not exceed its output. Mining profitability is also dictated by the exchange rate but under all circumstances the more power efficient the mining device, the more profitable it is.

Unfortunately, as good as the ASICS there are some downsides associated with Bitcoin ASIC mining. Although the energy consumption is far lower than graphics cards, the noise production goes up exponentially, as these machines are far from quiet. Additionally, ASIC Bitcoin miners produce a ton of heat and are all air‐cooled, with temperatures exceeding 150 degrees F. Also, Bitcoin ASICs can only produce so much computational power until they hit an invisible wall. Most devices are not capable of producing more than 1.5 TH/s (terrahash) of computational power, forcing customers to buy these machines in bulk if they want to start a somewhat serious Bitcoin mining business.

Software

While the actual process of Bitcoin mining is handled by the mining hardware itself, special Bitcoin mining software is needed to connect the Bitcoin miners to the blockchain.

The software delivers the work to the miners and receives the completed work from the miners and relays that information back to the blockchain. The best Bitcoin mining software can run on almost any desktop operating systems, such as OSX, Windows, Linux, and has even been ported to work on a Raspberry Pi with some modifications for drivers depending on the platform.

Not only does the Bitcoin mining software relay the input and output of the Bitcoin miners (hardware) to the blockchain, but it also monitors them and displays general physical statistics such as the temperature, hash rate, fan speed, and average speed of the mining hardware.

Cloud Mining

Managing mining hardware at home can be hectic, considering electricity costs, hardware maintenance, and the noise/heat generated by dedicated hardware that has to be run in data centers. Because of the high energy costs for running a powerful Bitcoin miner, many operators have chosen to build data centers known as mining farms in locations with cheap electricity. To ease the stress of mining, these operators dedicated to renting out their mining hardware for a service called Bitcoin cloud mining.

As innovative as the idea may sound, it is essential to know that there are both advantages and disadvantages to Bitcoin cloud mining.

Some of the advantages include:

It removes cloud factors such as investing in Bitcoin mining hardware, having it shipped to your door for a fee, and running the risk of paying VAT on top of all that.

There are no settings to worry about, as nearly every Bitcoin cloud mining provider will automatically point your rented hardware to a Bitcoin mining pool.

No shipping costs and VAT risk to take into account, Bitcoin cloud mining seems to be a safe bet when it comes to entering the mining scene.

Also, some disadvantages of cloud mining may include the following:

No full control over the mining equipment: As a customer, with cloud mining you’re never in full control of the hardware you rent because you cannot physically or remotely access the miner itself.

You are forced to trust a third party with your assets. You’ll have to rely on a centralized third‐party service provider, to be honest with you and not to pocket a share of earnings for itself.

Unexpected charges for maintenance costs.

What Are Bitcoin Mining Pools?

Early in the days of Bitcoin, it was possible for one miner to mine a steady number of Bitcoins on his or her own.

As Bitcoin has become more popular, however, the algorithm has proven too difficult for single miners to handle. That’s why miners have started joining Bitcoin mining pools.

Bitcoin mining pools push the processing power of multiple computers together to solve Bitcoin algorithms. Each miner in the pool receives a share of the Bitcoins being mined. That share is proportionate to the amount of processing power input into the pool.

Another advancement in mining technology was the creation of the mining pool, which is a way for individual miners to work together to solve blocks even faster. As a result of mining in a pool with others, the group solves many more blocks than each miner would on his own. Bitcoin mining pools exist because the computational power required to mine Bitcoins on a regular basis is so vast that it is beyond the financial and technical means of most people. Rather than investing a huge amount of money in mining equipment that will (hopefully) give you a return over a period of decades, a mining pool allows the individual to accumulate smaller amounts of Bitcoin more frequently.

When deciding which mining pool to join, one needs to weigh up how each pool shares out its payments and what fees it deducts. There are many schemes by which pools can divide payments. Most of which concentrate on the number of shares which a miner has submitted to the pool as proof of work.

A mining pool sets a difficulty level between 1 and the currency’s difficulty. If a miner returns a block which scores a difficulty level between the pool’s difficulty level and the currency’s difficulty level, the block is recorded as a ‘share’. There is no use whatsoever for these share blocks, but they are recorded as proof of work to show that miners are trying to solve blocks. They also indicate how much processing power they are contributing to the pool the better the hardware, the more shares is generated.

The other factor to consider is how much the pool will deduct from your mining payments. Typical values range from 1% to 10%. However, some pools do not deduct anything.

It is important to note that mining pool should not exceed over 50% of the hashing power of the network as this could lead to 51% attack for the Bitcoin network. If a single entity ends up controlling more than 50% of a cryptocurrency network’s computing power, it could wreak havoc on the whole network.

Commonly Used Pool Payment Methods

Major schemes invented in calculating the share(s) of each member include:

Pay-per-Share (PPS):

This is the most basic version of dividing payments. This method shifts the risk to the pool, guaranteeing payment for each share that’s contributed. Thus, each miner is guaranteed an instant payout. Miners are paid out from the pool’s existing balance, allowing for the least possible variance in payment. However, for this type of model to work, it requires a very large reserve of 10,000 BTC to cover any unexpected streaks of bad luck.

Double Geometric Method (DGM):

The DGM model is a hybrid approach that enables the operator to absorb some of the risks. Here, the operator receives a portion of payouts during short rounds and then returns it during longer rounds to normalize payments for pool participants.

Bitcoin Pooled Mining (BPM):

BPM is a payment model where older shares from the beginning of a block round are given less weight than more recent shares. One of the biggest benefits of BPM is that its design inherently reduces the ability to cheat the mining pool system by switching pools during a round. This model is also known as “SLUSH’S POOL”

How to Start Bitcoin Mining

Anyone with an internet connection and basic computer hardware can participate in Bitcoin mining.

Unfortunately, “participating” in Bitcoin mining isn’t the same thing as actually making money from it. The new ASIC chips on the market today are specifically designed for mining Bitcoin. They’re really good at Bitcoin mining, and every time someone adds a new ASIC-powered computer to the Bitcoin network, it makes Bitcoin mining that much more difficult.

Another thing to consider before mining Bitcoins is that you’ll need to pay for electricity and hardware. Those are the only two real costs associated with Bitcoin mining.

Some people have purposely based their Bitcoin mining operations near cheap sources of electricity. By relocating to these areas and operating large Bitcoin mining networks, you can mine Bitcoins at the cheapest possible rate.

North America’s largest Bitcoin mining operation, for example, is run by MegaBigPower and is located on the Columbia River in Washington State. The Columbia River provides an abundance of hydroelectric power to the surrounding area, making that part of Washington State the cheapest source of electricity in the nation.

Electricity is used not only to power the computers, but also to keep them cool. Just like people base their Bitcoin mining operations near sources of cheap electricity, some people have purposely placed their Bitcoin mining operations in places with cool climates.

In any case, here’s a basic step by step guide you’ll need to go through to start mining Bitcoin:

Step 2) Install the client and let it download the Bitcoin blockchain. That blockchain is about 6GB in size. You can also order the Bitcoin blockchain on a DVD if you don’t want to burn through that much data.

Step 3) Once your client has fully updated, you’ll need to click “New” in the Bitcoin client to get a new Bitcoin wallet. Your wallet is just a long alphanumeric sequence. Make sure you keep a copy of your wallet.dat file on a thumb drive. Print a copy out and keep it in a safe location. Put a copy in cloud storage. You do this because if your computer crashes, then you’ll lose all your Bitcoins if you can’t access the wallet.dat file.

Step 4) Join a Bitcoin mining pool. There are thousands of Bitcoin mining pools on the internet today. If you don’t join a pool, then you’re probably never going to make any money from Bitcoin mining. The algorithms are just too difficult for single users to solve and you’re unlikely to be awarded

Conclusion: Should You Start Bitcoin Mining?

Ultimately, Bitcoin mining is becoming an arms race. In the early days, anyone with a decent PC could generate Bitcoins through Bitcoin mining. Today, you need to collaborate with other Bitcoin miners in pools, strategically choose the location of your Bitcoin mining operation, and purchase ASIC-powered computers that are specially designed to handle Bitcoin mining.

Unless you’re prepared to do all of those steps, Bitcoin mining will be a frustrating and unprofitable operation.